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Disaster awaits leaders who procrastinate

Scott McCulloch is editor of Families in Business.

According to an old adage, with age comes wisdom. In the family business world, some would beg to differ. Consider the question of why aging family business leaders tend to dawdle on the way to exit or even fail to see the good sense of preparing to pass on their business in good time. Given the emotional trouble many entrepreneurs have selling or handing down their business you would be forgiven for thinking they were giving away one of their children. In a way, they are.
At the start, leaders show massive drive and commitment to building their business. It is normal, say psychologists, for a family leader who has created a business to look upon it as another child. So is it the heart or the head that underpins the enterprise? Both, if the growing army of consultants are to be believed. Some family firm advisers believe the transition of a business from one generation to next to be so onerous a task that few CEOs willingly engage in the process. Yet procrastination, says Rein Peterson, a professor of family enterprise at York University in Canada, is a recipe for disaster. One of the worst cases, he says, is when owners hang on until they have one foot in the grave.
Really? Peterson says some succession plans provide the owner with the right to interfere in the business operations if certain profit or sales targets are not met. Before a majority stake in the business changes hands, the successor might require reaching certain financial targets. This is perfectly sensible, but scions need training and support if they are to get a crack at running the show. The great irony is that leaders must work hard to make themselves obsolete. If, say, a patriarch decides to transfer the business to his children and he still wants cash flow from the business, what does that imperil? His payout.
Wisdom may come with age but in a family business ­emotional strain is a dead certainty. It should come as no surprise, then, that around 70% of those delegates attending the most recent annual meeting of the Family Firm Institute in Boston were family therapists.
Fortunately, the quality of family business research has matured to a point where entrepreneurs can draw on a welter of practical advice. Indeed, trends are evident. Five to ten years ago, say consultants, the emphasis was on persuading patriarchs to let go. Now it entails talking second-generation baby boomers through the finer points of dealing with siblings or cousins who are in management or are shareholders. Of course this is a key aspect of what makes families businesses unique: they combine all the tensions of family life with all the stresses of business life. If there's hand wringing and emotional torment come succession time, then so be it. It is inevitable.
For many, the day of reckoning has come. According to the Family Firm Institute, almost 40% of the USA's family owned businesses will have changed their leadership between 2003 and 2008. What to do? A senior figure in a 200-year old European family business recently told me how to overcome the struggle of generational change: "Use your ears and mouth," he said. "Listen and talk." Family business experts concede this is rarely a picnic in a company built from scratch, especially when business patriarchs, who tend to have controlling personalities, eschew egalitarianism.

Optimists will say the parents mean well. Sceptics might see Machiavellian forces at play. Perhaps Warren Buffet has the answer. When the US investment guru wrote his estate plan, he dismissed the idea of handing billions over to his two children. Instead, he devised a plan in which his daughter, a magazine editor, and his son, a farmer, would receive "enough so they could do anything, but not enough so they could do nothing". Wise ­planning indeed.

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